For fiscal year 2012, Mango Computer, Inc.

, reported net sales of $19,323 million, net income of

$1,997 million, and no significant discontinued operations, extraordinary items, or accounting
changes. Earnings per share was $2.20. At a capitalization rate of 5%, how much should one
share of Mango stock be worth? Compare your estimated stock price with the market price of
$94.02 as quoted in the newspaper. Based on your estimated market value, should you buy, hold,
or sell Mango stock?
SOLUTION
Estimated value
of one share
of Mango stock

Earnings per share

Investment
capitalization rate

$2.20
.05

$44.00

Mangos stock is quoted at $94.02. At that price, an investor should sell because the investor
believes the stock is worth only $44.00.